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AUGUST 20, NEW YORK, NY: On August 20, 2013, in New York City, a Best Buy store is seen. Best Buy, the electronics and entertainment retailer, reported a $266 million profit in the second quarter, up from $12 million the previous year. Best Buy implemented cost-cutting measures while rebuilding locations to better compete with discounters and online retailers after a period of struggle. (Photo courtesy of Getty Images/Spencer Platt)
courtesy of Getty Images
There are two specialty retail stocks that we believe are currently undervalued compared to Best Buy (NYSE: BBY). BBY’s current price to operating income ratio (P/EBIT) of 29x is substantially higher than Lithia Motors and Lowe’s, which both have P/EBIT ratios of under 20x. Is there any logic to the valuation disparity between BBY and its peers? We don’t believe so, especially when we consider these companies’ fundamentals. We came to this conclusion by analyzing historical patterns in revenue, operating income, and the P/EBIT ratio for these companies. More information is available on our dashboard Better Bet Than BBY Stock: Pay Less To Get More From LAD, LOW, sections of which are summarized here. 1. Increased revenue
Over the last three years, BBY’s revenue has grown at an average rate of 3.9 percent, compared to 9.3 percent for Lithia Motors and 9.8 percent for Lowe’s. Even if we look at revenue growth over the last year, BBY’s growth of 8% is significantly lower than Lowe’s increase of 24 percent. During this time, however, Lithia Motors only grew by 3.6 percent.
Best Buy is a speciality retailer that sells consumer electronics, office supplies, entertainment software, appliances, and other associated services. Consumers have been encouraged to invest in technology as a result of the healthy housing market. Due to sales growth across practically all categories, with the highest gains in home theater, computing, and appliances, the company’s comparable sales metrics climbed 37.2 percent in the first quarter, rather than the 17.1 percent predicted by the market. After witnessing demand continue throughout the second quarter, the company boosted its year-end prediction. Customers are expected to increase spending in other areas, such as travel and dining out, in the second half of the year, according to the business.
Lithia Motors is a well-known automotive dealership that sells new, used, foreign, and luxury vehicles. In 2020, the company’s revenues increased 3.6 percent year over year, owing to higher used car sales offset by lower demand for new cars. In the first quarter, the company’s results paralleled outperformance across the board. It had the largest adjusted first-quarter earnings in company history, at $5.89 per share, up 193 percent year over year, and a 55 percent year-over-year revenue gain.
After Home Depot, Lowe’s is the world’s second-largest home-improvement retailer, and it benefited from the increase in spending during the pandemic. Lowe’s had unprecedented sales growth in 2020, adding over $17 billion to its sales base year over year and posting record profits. Consumers appear to be continuing to spend in their homes despite the relaxation of stay-at-home regulations, as the company witnessed sales increase among home professionals in Q1. The retailer’s first-quarter same-store sales increased by 30%, bringing total sales to $24.4 billion, up by 24% year over year. The retailer’s earnings increased to $3.21 a share from $1.76 a year ago.

2. Increased Operating Income
BBY’s average operating income increase over the last three years was only 9%, compared to 19% for Lithia Motors and 22% for Lowe’s. Higher operating income resulted from the latter two’s improved revenue growth. In the previous year, BBY’s operating income increased 19 percent, compared to 41 percent and 38 percent for Lithia Motors and Lowe’s, respectively.

Trefis Revenue Growth
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Although BBY has a far larger revenue base than Lithia Motors but a smaller revenue base than Lowe’s, both of these firms have seen higher revenue and operating income growth in the last three years than BBY. Despite this, they appear to be far less expensive than BBY. These businesses have a lower P/EBIT ratio despite higher profit and revenue growth.
The underperformance of BBY in terms of sales and operating income growth when compared to its rivals confirms our judgment that the company is overvalued, and we believe the valuation gap will close over time, favoring the group of considerably less expensive names. As a result, we feel Lithia Motors and Lowe’s are currently better purchasing options than BBY.
Retail revenues are being eroded by e-commerce, yet this could be an investment opportunity. A wide range of companies that stand to benefit from the huge change may be found in our E-commerce Stocks topic.
Here you may find all of Trefis’ Featured Analyses and Trefis Data./nRead More

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